US financial regulators to review of Volcker Rule for foreign funds

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Paul Volcker, former Federal Reserve chairman, speaks at the National Press Club April 20, 2015 in Washington, DC.

U.S. financial regulators announced on Friday they would review Volcker Rule regulations to ensure foreign funds that should be exempt from the ban on proprietary trading by U.S. commercial banks do not face regulatory scrutiny.

The agencies charged with enforcing the ban on proprietary trading, including the Federal Reserve, the Federal Deposit Insurance Corp and the Commodity Futures Trading Commission, said they would halt enforcement of the Volcker Rule for one year for qualifying foreign funds while they conduct the review. They added that they may need Congress to step in and alter the Dodd-Frank financial reform law to ensure those foreign funds are not subjected to the rule.

The staff of the agencies are considering ways in which the implementing regulations may be amended, or other appropriate action may be taken, the regulators said in the announcement.

Regulators are expected to launch a more comprehensive review of the rule in the months to come.

The rule, a centerpiece of the 2010 Dodd-Frank law, is aimed at preventing federally insured banks from trying to boost profits with risky trades. Advocates called the rule is a critical check against the type of trading excesses that led to the 2007-2009 financial crisis, requiring taxpayer bailouts of banks.

Banks have complained that the rule is too restrictive, arguing that it can be almost impossible to distinguish between prohibited trading from permitted activities like market-making.

On this specific fix, regulators said they had heard from a number of foreign banking entities and government officials, expressing concern that current regulations may be improperly applying the rule to some foreign funds.

If a fund is organized and offered outside the United States, it typically is excluded from the Volcker rule, which is primarily aimed at banks with U.S. federal deposit insurance. But in some cases, certain governance structures and investment arrangements were leading to Volcker enforcement anyway.

Regulators said “complexities in the statute and the implementing regulations” were to blame for the rule’s improper reach.

Treasury Secretary Steven Mnuchin has identified easing the rule as a top priority, and regulators have said the existing rules could be revisited for refinement.

Regulators finalized the Volcker Rule in 2013, two and a half years after Dodd-Frank became law.